Invigorating education with informed, early-stage investing

Private enterprises in India’s education system face quite a conundrum.

There’s a well-documented need to improve the quality of education—both government and private—of the more than 250 million children currently enrolled in the K-12 segment. We have witnessed unprecedented growth in the establishment of private schools, which currently account for 40 percent of total student enrolment.[1] Moreover, education is valued among all of India’s residents and, regardless of income level or geographic location, parents are prepared to invest a fair share of income on their children’s education.

Now, juxtapose those alarming facts—and the USD $100 billion annual total cost of education (government and private) in India—with estimates that the education sector receives a mere 3 percent of the equity investments[i] made in the country. You can see why entities aimed at improving the education sector for the whole of India are frustrated and perplexed by so little support from impact investors, whose objective is to invest in socially relevant products for the low-income population.

Impact investors do seek high-quality solutions that meet the educational needs of all segments of society, but their concerns center on governance, growth potential and profitability of the available products and services.

So how, then, can struggling private enterprises in India’s education sector scale to support this generation of students, our country’s greatest assets for the future?

We implore early-stage investors to lead the way to a new era of impact investing—one that sees an uptick in the calculated risks investors will take on entities with the potential to improve India’s education system.

Evaluating risks and assessing potential

We implore early-stage investors to lead the way to a new era of impact investing—one that sees an uptick in the calculated risks investors will take on entities with the potential to improve India’s education system.

For our own investments, we have stringent requirements for quality, low-income client focus, financial viability and scalability. In 2012, we began evaluating for-profit investment opportunities using the same yardstick as for the non-profit investments we’d made in the education sector since 2006. The goal of expanding our funding model was to ensure our new partners could maintain financial stability, quality and a focus on low-income constituents, while scaling their businesses. In late 2014, the foundation committed its support to three seed funds with a clear focus on supporting social enterprises delivering education and/or skill training opportunities.

As we look to catalyse an entrepreneurial eco-system focused on education ventures, we hope to activate an expanse of opportunities for all social and mainstream investors, as well as ignite growth in the education sector. Insights we encourage investors to consider as opportunities are being weighed against risks include:

Our experience in sector-based funding strategies, there are some factors to keep in mind when evaluating risks and assessing potential.

No two segments are alike in the education sector. Evaluate each, separately, based on growth potential, possible barrier to entry and capacity to establish relationships with parents/students.

Partnerships are critical to increasing scale. Collaboration can reduce financing and sales costs. Financing companies offering loans, like Varthana, are collaborating with education product enterprises on their go-to-market-strategies, thus providing easier access to the existing distribution channel of the Affordable Private School (APS) market.

Help from other investors, incubators and consultancies is available. Impact investing in education in risky and complex. Rely on the expertise and insights of others when possible.

This is a cyclical business. Sales to schools peak in June – October, as most education businesses follow the annual academic cycle. Beware of this when evaluating annual forecasts and ensure there is adequate funding ahead of peak sales cycles.

Renewal rates are the true test of product quality. New products attract new customers, but if they don’t meet expectations, customers will not return for future sales. The ability to retain customers and increase renewals should be a critical benchmark for potential investments.

Impact investments attached to debt should be prioritized over equity investments. Education start-ups can then be allowed to grow without the pressures of equity investments, which require far more established, scalable propositions.

Looking ahead

The foundation will continue to actively evaluate investments alternatives that will improve the quality of education for low-income students. We look forward to others taking measured impact investment risks that will propel India’s education sector forward.